Westlake Chemical Partners LP — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise stated. The Partnership controls and consolidates OpCo, which owns three ethylene production facilities and a pipeline, but held an 18.3% limited-partner interest in OpCo. Westlake owned the remaining 81.7% and is also the Partnership’s principal customer and lender.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Total net sales | $284.3 million | $277.4 million | Up 2.5%; sales volume increased 5.6%, while average sales price decreased 3.1%. |
| Gross profit | $92.5 million | $98.0 million | Down $5.5 million. |
| Gross margin | 32.5% | 35.3% | Lower mainly because of reduced third-party sales prices. |
| Income from operations | $85.4 million | $90.1 million | Down $4.8 million. |
| Consolidated net income | $80.7 million | $86.0 million | Down $5.3 million. |
| Net income attributable to the Partnership | $12.3 million | $9.8 million | Up $2.5 million, primarily reflecting the 5% increase in the Partnership’s OpCo interest effective July 1, 2017. |
| Partnership net income per common unit | $0.36 | $0.35 | Q1 2017 included common and subordinated units; subordinated units converted to common units in 2017. |
| MLP distributable cash flow | $14.5 million | $11.4 million | Up $3.1 million, primarily due to the increased OpCo interest. |
| EBITDA | $113.6 million | $121.9 million | Down $8.4 million, mainly due to lower third-party sales prices. |
| Net cash from operating activities | $106.2 million | $149.1 million | Down $42.9 million, chiefly from lower operating income and a less favorable working-capital contribution. |
Cash, debt, and liquidity
- At March 31, 2018, cash and cash equivalents were $25.0 million. The Partnership also had $134.2 million invested with Westlake under an agreement providing daily availability; the balance-sheet receivable under that agreement was $134.7 million, including accrued interest.
- Total debt payable to Westlake was $477.6 million: $224.1 million under the OpCo Revolver and $253.5 million under the MLP Revolver. Both facilities are variable-rate; the weighted-average interest rate was 4.08%. The OpCo Revolver was scheduled to mature in August 2019 and the MLP Revolver in 2021. The Partnership reported compliance with debt covenants.
- Long-term debt fair value was above carrying value: $487.2 million versus $477.6 million. The filing classifies the fair-value estimate as Level 3.
- Cash used in investing activities was $7.7 million, including $9.7 million of property, plant and equipment additions. Cash used in financing activities was $100.6 million, including $91.1 million of distributions to Westlake and $13.1 million to unitholders, partly offset by $3.6 million of borrowing.
- Total liabilities were $517.3 million and total equity was $975.3 million at quarter-end. The filing does not provide a consolidated leverage ratio in the supplied text.
Material changes and operating drivers
- Sales to Westlake rose to $235.0 million from $212.9 million, while third-party sales fell to $49.2 million from $64.5 million. Westlake represented approximately 82.7% of net sales, compared with 76.7% a year earlier.
- Higher production and sales volumes—particularly at Calvert City, where Q1 2017 production was affected by an upgrade and expansion project—partly offset lower third-party prices. Industry average ethylene spot prices cited in the filing were 23.6 cents per pound versus 31.2 cents per pound in Q1 2017.
- Operating cash flow declined in part because working capital used $3.2 million in Q1 2018, compared with providing $43.2 million in Q1 2017. The prior-year benefit mainly reflected partial recovery of a previously recognized shortfall receivable from Westlake.
- Interest expense declined to $4.9 million from $5.5 million, primarily due to lower average debt after repayments in the second half of 2017. Other income also declined, partly because Q1 2017 included an insurance recovery related to a 2016 Calvert City shutdown.
Outlook, distributions, and risks
- Management expected 2018 capital expenditures of approximately $60.4 million; $9.7 million had been spent in Q1. Westlake historically funded expansion spending and was expected to provide further loans, but is not obligated to do so.
- The board declared a Q1 2018 distribution of $0.3975 per unit, payable May 24, 2018, plus $733,000 to the incentive distribution rights holder. The filing states the aggregate quarterly distribution was approximately $13.5 million. Distributions are not contractually guaranteed.
- The Ethylene Sales Agreement is a long-term, fee-based arrangement with a minimum purchase commitment and cost-plus pricing intended to provide a fixed cash margin per pound. Direct commodity-price exposure is limited primarily to approximately 5% of ethylene production sold to third parties; indirect exposure is described as substantially mitigated during the agreement term.
- All debt was variable rate, although a portion’s LIBOR component was fixed through an interest-rate contract. A 100-basis-point increase in the applicable average variable rate, excluding the effectively fixed portion, was estimated to increase annual interest expense by approximately $4.1 million.
- Environmental matters include EPA flare enforcement, an EPA Risk Management Program investigation, and Kentucky notices of violation. The Partnership stated each matter may require a monetary sanction exceeding $100,000. Westlake has agreed to indemnify certain pre-August 4, 2014 liabilities; the filing does not quantify the ultimate exposure for these matters.
- Management said it believed available cash and financing sources would meet liquidity and capital needs, while noting Westlake is not required to provide additional financing. Key risks include commodity prices, feedstock and energy costs, plant interruptions, customer credit, regulation, access to capital, and environmental obligations.
Important facts for investors to verify
- Track third-party product prices and volumes, and whether higher production continues to offset price pressure.
- Review Westlake’s 82.7% share of sales and the related-party terms for sales, feedstock, services, invested cash, and borrowing.
- Verify the timing and funding of the approximately $60.4 million 2018 capital program and any further Westlake loans.
- Monitor debt maturities, variable-rate exposure, covenant compliance, and the availability of invested cash and revolver capacity.
- Follow the status, potential sanctions, and any remediation costs associated with the environmental proceedings.
- Assess distribution coverage and sustainability: Q1 declared distributions, including IDRs, exceeded Partnership-attributable net income by $1.3 million; distributable cash flow is a non-GAAP measure and excludes working-capital changes.